Commentary

Drop In Housing Starts, Permits Could Dampen Economic Growth

Residential construction, which has a broad-based impact on the economy, fell for the second month in a row in June, according to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, even as mortgage rates were dropping. 

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“Housing starts … fell 0.9% in June from the prior month to a seasonally adjusted annual rate of 1.253 million. … Residential building permits, which can signal how much construction is in the pipeline, dropped 6.1% from May to an annual pace of 1.220 million. That was the biggest monthly drop since March 2016,” reports Harriet Torry for The Wall Street Journal.

“Economists surveyed by The Wall Street Journal had expected a 0.7% decrease for starts and a 0.3% decrease for permits,” Torry adds. The decline also was greater than what was expected by economists polled by Reuters. They predicted a pace of 1.261 million units.  At the same time, financing was presumably more favorable.

“Mortgage rates have been decreasing since the Federal Reserve signaled it was pausing its interest rate raising campaign. Borrowing costs could drop further as the U.S. central bank is poised to cut rates this month for the first time in a decade to protect the economy from rising threats from Washington’s trade dispute with Beijing, and slowing global growth,”  writes Reuters’ Lucia Mutikani.

“Residential housing construction is one of the leading indicators of a recession, and while construction activity isn’t dropping precipitously, housing is stuck in a rut,” says Chris Rupkey, chief economist at MUFG in New York. “If the Fed thinks rate cuts are going to send housing construction up like a rocket, they better think again.”

“A confluence of many factors -- slower economic growth abroad, tighter capital controls in China, a stronger U.S. dollar and a low inventory of homes for sale -- contributed to the pullback of foreign buyers. However, the magnitude of the decline is quite striking, implying less confidence in owning a property in the U.S.,” says National Association of Realtors chief economist Lawrence Yun, commenting on the NAR’s annual survey of residential purchases from international buyers, which was also released yesterday.

China exceeded all other countries in terms of dollar volume of purchases, buying an estimated $13.4 billion worth of residential property, but interest has been ebbing over the recent year.  More specifically, “in the first quarter of this year, Chinese buyer inquiries for U.S. properties on Juwal.com, a Chinese real estate site, were down 27.5% from a year ago. Inquiries have been down in four of the last five quarters,” writes CNBC’s Diana Olick for USA Today.

“We call it the Trump effect. It’s a combination of anti-Chinese political rhetoric, a clampdown on visa processing, and of course tariffs,” Carrie Law, CEO and director of Juwal.com, tells Olick. “The Trump effect is undercutting some of the primary drivers of Chinese demand for U.S. property, including buying homes for students who are studying in the U.S. and the country’s reputation as a safe investment.”

The drop in building permits, meanwhile, “signals that builders are unlikely to ramp up construction much,” writes  Jeffry Bartash for MarketWatch. “Permits in the South fell to the lowest level in two and a half years. And permits for multi-unit projects such as apartment buildings and condo complexes slid to a three-year low, though it’s a volatile segment prone to sharp monthly swings.”

What’s the answer? 

“Navy Federal Credit Union economist Robert Frick said lower mortgage rates are not spurring the home building industry to increase construction, as lack of skilled workers, cheaper material costs and land zoned for building continue to hamstring production,” Alcynna Lloyd writes  for HousingWire.

“In June, the industry dropped on all three major metrics: building permits, housing starts and housing completions,” Frick says in a note to clients cited by Lloyd. “Given the relatively high price of new homes as well as the lack of supply, the dream of home ownership continues to be out of reach for millions of Americans.

“Currently, the rate of new homes coming to market, at about 1.2 million annually, is a quarter of a million shy of demand given population growth and historical averages,” Frick continues. “The market is currently not equipped to meet demand, so it might take a concerted effort by governments to widen the bottlenecks that are restricting new home building if the problem is going to be addressed quickly."

Widen the bottlenecks, indeed -- and maybe throttle the rousing rhetoric.

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